Changes to investment taxes in 2023 – how will you be affected?
In the coming financial year (2023/4), significant changes are being made to both capital gains tax, and tax on dividends, with savers and investors now expecting to pay significantly greater sums to HMRC.
In this article we’ll answer the following questions:
- What is capital gains tax?
- What is tax on dividends?
- How is the legislation changing, and what can you expect to pay on profits from your investments?
- What are some of the alternative methods of saving you can use to limit your tax exposure?
What is capital gains tax?
Capital gains tax is charged on the profits generated when an asset that has appreciated in value is sold or disposed of. This definition therefore covers gifting, trading or claiming an insurance on a number of high value assets.
It covers most items worth more than £6,000 apart from your home or car. However, other property investments such as rental or holiday units are included. You are also expected to pay capital gains tax on any investments outside of your ISA or pensions allowance, as well as any assets held under the name of a business. Investors are allowed a personal allowance on their capital gains, meaning profits are only taxed once that number is exceeded.
For example, if you bought a holiday home for £200,000, and now expect to sell the same unit for £300,000, you would have to pay a tax on the majority of the £100,000 generated as profit.
The rates you are expected to pay differ depending on the type of asset being sold, and your income. Generally those in the basic rate of tax can expect to pay a rate of 10%, while higher earners are charged 20%. For more, visit the Government Gateway website.
What is tax on dividends?
Tax on dividends, are paid when a company you own shares in pays a dividend to you based on company performance. The rate of tax depends on how much total income you are expecting to earn in a financial year. The rates are as follows:
- basic rate: 8.75%
- higher rate: 33.75%
- additional rate: 39.35%
Again, this tax is payable on the dividends generated above the personal allowance.
For example, if you are expected to pay the higher rate of income tax, and you receive £4,000 of dividends above your personal allowance, you would pay £1,350 in tax.
For more information on these taxes, visit the government website:
How is the legislation changing? And how much tax will you be expected to pay?
The personal allowances for both of these taxes is being reduced, meaning investors may be paying much higher levels of tax than before. The allowances for capital gains tax will change as follows:
- 2022/3: £12,300
- 2023/4: £6,000
- 2024/5: £3,000
What does this mean in reality for investors? Well let’s say you sell an asset that has appreciated in value by exactly £12,300. In the current tax year, you wouldn’t be required to pay anything to HMRC.
In the coming financial year, a basic rate taxpayer would be expected to pay £630 to the revenue services. See the table below:
|Final capital gains tax liability in 2023/4||£630|
In the following tax year, this burden would increase further to £930. Investors paying the higher rates would expect to pay £1,260 in 2023/4, and £1,860 in 2024/5, respectively.
The decrease in personal allowance in regards to tax on dividends is equally significant. Again, the current allowance will be halved in consecutive years:
- 2022/3: £2,000
- 2023/4: £1,000
- 2024/5: £500
Using the example of a basic rate payer that had received exactly the previous allowance of £2,000, we can see an increased tax burden of £87.50:
|Final tax on dividends liability in 2023/4||£87.50|
This would then increase to £131.25 the following year. For those paying the higher rate of tax this presents a bill of £393.50 in 2024/5, while additional rate taxpayers would have to shell out over £500.
What are some of the alternative methods of saving you can use to limit your tax exposure?
These changes to personal allowances come with a lowering of the thresholds for additional rate income tax payers. From 2023/4, those earning over £125,140 will be expected to pay 45% tax on any income over that threshold.
This means it’s vitally important for higher earners to utilise different methods of saving and investing.
Anyone earning at that rate should be using their full tax-free ISA allowance of £20,000 before investing in other businesses. A stocks and shares ISA for example allows you to invest in the market, and keep all of your dividends and profits tax free.
Putting money away in a private pension is also advisable. The annual tax-free allowance for investing in a pension is increasing to £60,000 following the Government’s latest budget.
For those people that are worried about cashing in on an asset they’ve held for a long time, don’t rush into a hasty sale. While there may be extra incurred cost, selling before the ideal time, or before you absolutely need the capital, could lead to money lost in the long-term.
With all of these types of considerations, we’d recommend seeking advice from a financial advisor to get the best mix of investment. The basi
For any questions you may have on the tax implications of your investment portfolio, please don’t hesitate to get in touch.